This is the first of several updates from the PICPA Federal Tax Committee planned over the rest of the year to keep our members informed with facts and without political spin.
By Robert Duquette, CPA
As of the time of this posting, Congress’s effort to repeal and replace the Affordable Care Act (ACA) seems to be on a respirator. Most conservative Republicans want either a complete repeal or at least substantial cuts in its funding and coverage. Moderate Republicans are concerned that current proposals go too far and are not adequately compassionate. Many fear a voter backlash will come next year. There is no support for the Republican plan from the Democrats, who want to keep the ACA and make fixes where necessary.
Why do I start this tax reform update with an overview of health care reform? Because the Republicans needed health care reform passed first as a basis to make tax reform more “affordable.” You see, health care reform was originally intended to repeal all the taxes that were put in place by the ACA, which total $500 billion over 10 years. Both the House tax reform blueprint and the president’s tax reform outline unveiled in April, as well as a more detailed version put out during his campaign, call for repeal of these same taxes. Therefore, without health care reform, the “cost” of tax reform becomes a higher hurdle to overcome in terms of its impact on deficits, as well as aggravating the perception of how tax reform may benefit the wealthy.
If Republicans cannot agree on how to reform health care (something they have been promising for the past six years), then how will they reach agreement on how to reform the tax code? If they think health care reform is complicated, wait until they begin to realize all the unintended consequences of changing one word in the over 4 million-word tax code we have patched together over the past 104 years! Not to mention the resistance they will get from the myriad constituencies who will be affected by the loss of various deductions (such as state and local taxes, business interest expense, or the cost of imports). Additionally, because the top 1 percent pay almost 40 percent of individual taxes, there will be the outcry that the distributional impact of tax reform, at least as currently outlined, will go primarily to that top 1 percent. (The Tax Policy Center estimates that between 50 percent and 99 percent of the individual benefits will go to the top 1 percent over the next decade, depending on whether the president’s plan or the House plan gets enacted.)
Then there is the debate that will ensue regarding how much tax cuts actually grow the economy, and at what cost in terms of annual deficits. Independent analyses of the president’s plan and the House plan indicate that there would probably be trillions of dollars added to the federal debt over the next 10 years. The Tax Foundation estimates that both the president’s plan (as outlined earlier this year) and the House plan would probably raise real GDP by about 1 percent annually over the latter part of the next decade, from the current 2 percent to 3 percent; however, both plans would also increase the federal debt by anywhere from $200 billion to possibly $6 trillion over a 10-year period, depending on which plan they studied and whether static or dynamic modeling was used. Moreover, despite the president’s insistence that his April plan will pay for itself from increases in economic growth, a recent analysis shows it will add $3 trillion to $7 trillion more to the debt over the next 10 years.
One more roadblock seems to have surfaced. The Republicans knew they would have needed 60 votes in the Senate to avoid a Democrat filibuster. Therefore, they were hoping to pass tax reform through the “budget reconciliation” process, which only requires 51 votes in the Senate. This procedure, however, requires that tax reform must be revenue neutral over a 10-year scoring period, or the provisions under tax reform would expire, which would bring back the current tax code. Of course, this 10-year limit is congressionally imposed, so there is talk of extending that window to whatever it will take to appease deficit hawks. Sen. Pat Toomey (R-Pa.) recently proposed extending that window to 20 years. Any period of budget reconciliation is not available, of course, unless there is an actual budget. At the time of this writing, Republicans seemed deadlocked on how much to increase the defense budget vs. how much to cut other discretionary spending, including numerous public welfare programs. There are also disagreements regarding other congressional priorities, such as raising the debt ceiling, the Budget Control Act caps, current year appropriations, administrative appointments, and judicial nominations.
What are the tax reform principals saying about all these challenges, not to mention the upcoming five-week August recess? Well, Senate Majority Leader Mitch McConnell (R-Ky.) just declared a rare delay for the start of that recess until the third week of August. Treasury Secretary Steven Mnuchin earlier this month said that he still expects to have tax reform passed by the end of this year. House Speaker Paul Ryan (R-Wisc.) reiterated his commitment last month that he expects legislation in the fall, hinting that the biggest challenge, the border adjustment tax, may have to be revisited and transitioned over several years. Ways and Means Chair Kevin Brady (R-Texas) reiterated his commitment to have a bill ready in September.
With this Congress’s record of accomplishments so far in its first six months, one must seriously question if they can push through what was once considered by many as inevitable.
Robert Duquette, CPA, is a retired Ernst & Young tax partner, and currently serves as a professor of practice in the College of Business and Economics at Lehigh University. He has served on PICPA’s Federal Tax Committee for over 20 years. Read his full profile and Lehigh University blogs.
Other blogs in the Federal Taxation Committee Series:
For more information on 2017's landmark federal tax reform, check out the Federal Tax Reform Guide
presented by the Pennsylvania CPA Journal